NetApp's $1.5 Billion Buyback Appears Underappreciated

Brean Capital’s Ananda Baruah expects NetApp Inc. NTAP to be impact on May 26, following the soft April quarter revenue and below consensus July quarter guidance issued by the company.

Baruah maintained a Hold rating on NetApp.

The analyst believes that the Street might not be modeling in the $1.5 billion remaining from the company’s share buyback authorization while forecasting the FY18 EPS.

April Quarter

NetApp reported its revenue for the April quarter revenue and EPS below the consensus expectations, with the overall revenue declining 10 percent year on year and product revenue declining 17 percent year on year.

However, overall revenue grew sequentially, at one percent year on year. Product revenue also grew at the same rate, partially affected by the global IT spending environment through the quarter.

Baruah noted, however, that “demand has since shown improvement and acceleration especially in the strategic product segments.”

July Quarter Guidance

For the July quarter, NetApp guided to revenue of $1.20-$1.35 billion and EPS of $0.34-$0.39, as compared to the consensus expectations of $1.26 billion and $0.45, respectively.

Baruah pointed out that the revenue guidance implies a 4 percent year on year decline “due to further decline of mature business offset by growth in strategic products.”

On the other hand, management expects a rebound in gross margins from the April to the July quarter, as well as operating margins of 10 percent.

For FY17, the company guided to a moderation in the revenue decline, with strategic sales growing into a “stronger overall mix.”